Higher Interest Rates Support the Pound, but Macroeconomic Challenges Remain

Pound Sterling Forex Playbook for JUNE - BoE update

DERBYSHIRE GB / June 22nd, 2023 - Updated outlook after the Bank of England hiked 50bps due to high and sticky inflation. Next update after the final Q1 GDP report on Friday the 30th of June, or before if any significant event occurs.

This is the Pound Sterling Forex Playbook and is intended to be used as a guide to aid in your trade planning.

Macroeconomic Snapshot

The United Kingdom is facing a challenging macroeconomic situation that is causing high inflation and low growth which will pressure the pound lower but the outlook for improvement and the higher interest rates may add some upward support to the Pound’s value.

June Meeting of the Bank of England’s, Monetary Policy Committee (MPC)

• The Bank Rate was hiked by 0.50% in June to 5.00%, higher than the 0.25% hike in May

• The next meeting is on Thursday the 3rd of August

• The hiking cycle has risen higher and faster than anticipated and is expected to rise further with the 1Y Gilt Yield heading towards 5.5% which is an indication of future hikes. These higher yields could attract foreign investors which is expected to apply upward support on the pound's value.

GDP Growth Rate for Q1 2023, Preliminary Estimate

• GDP in the UK for Q1 remained steady at a 0.1% quarterly expansion since Q4 2022

• The final Q1 report is due on Friday the 30th of June

• The economy has grown as anticipated but is expected to grow a bit faster. This is likely to lead to increased stock market prices and a shift in investor preference away from safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

CPI Report for May

• CPI in the UK for May remained at 8.7% annual inflation from 8.7% in April

• The June report is due on Wednesday the 19th of July

• CPI has not fallen as anticipated although is expected to over the longer term. This is likely to cause higher interest rates and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply upward support on the pound’s value.

Labour Report for April

• Unemployment in the UK for April fell slightly to 3.8% from 3.9% in March

• The May report is due on Tuesday the 11th of July

• The labour market has improved better than anticipated but is expected to slightly deteriorate. This is likely to lead to slightly reduced growth and a shift in investor preference towards safer assets, such as government bonds. This is expected to apply indifferent support/pressure on the pound’s value.

Russian Invasion of Ukraine

• The war is having a detrimental effect on the global and UK economy by causing higher energy prices, supply chain disruptions, financial market volatility, refugee crisis and geopolitical uncertainty. This is expected to apply downward pressure on the pound’s value.

Brexit

• The UK's decision to leave the European Union (EU) has created a great deal of uncertainty about the future of the UK economy. This uncertainty has made investors less willing to take risks, which has led to a sell-off in risky assets, such as stocks and currencies. The resultant effects are expected to limit upward support on the pound’s value.

Cost of Living Crisis

• The UK cost of living crisis is having a negative effect on the value of the pound. This is because investors are becoming less confident in the UK economy and are therefore less willing to invest in British assets. This is expected to apply downward pressure on the pound’s value.

GBP/USD Long Term (Four Month View)

The GBP/USD has risen in the past four months, supported by a weaker dollar. This was driven by investors moving into riskier assets as they reconsidered the hawkish moves by the Fed although there was a brief period in May when the dollar was bought as a safe-haven as the banking crisis deteriorated and the debt ceiling deadline was nearing.

GBP/USD Short Term (Four Week View)

The GBP/USD has risen in the past four weeks, supported by central bank disparity. The Fed's hiking cycle is ending, weakening the dollar, while sticky inflation in the UK has warranted a more aggressive BoE.

GBP/USD Outlook

The events to keep an eye on:

• Monday the 19th of June

  • US National Holiday Juneteenth

• Wednesday the 21st of June

  • UK CPI 8.7%, was expected to fall to 8.4 from 8.7

  • Fed Chair Powell Testifies (Hawkish commentary) historically neutral regarding rates

• Thursday the 22nd of June

  • Bank of England Hikes 50bps was expected to hike by 0.25% to 4.75%

  • Bank of England Inflation Letter issued once every three months when CPI is above or below target

  • Fed Chair Powell Testifies (Hawkish commentary) historically neutral regarding rates

• Friday the 23rd of June

  • UK Retail Sales expected to have shrunk by -0.2% from 0.5% growth

  • US Services, Manufacturing PMI’s

• Wednesday the 28th of June

  • BOE Gov Bailey Speaks

  • Fed Chair Powell Speaks

• Friday the 30th of June

  • UK Final GDP Q1 expected to have growth by 0.1% 

CME Group 30-Day Fed Fund futures

• July: falling sentiment of a 0.25% hike, 75% in favour (prev. 80%)

• September: holding sentiment of a hold, 70% in favour (20% for a 0.25% cut - prev. 15%)

Short Term Value of the Pound Sterling to Appreciate, US Dollar to Stabilise: High inflation is hurting the spending power of consumers and deepening the cost of living crisis which is damaging economic growth. Moves are likely to remain above the recent rally from 1.26 as investors seek the higher bank rates.

Long Term Value of the Pound Sterling to Remain Steady, US Dollar to Steadily Decline : As the long-term view is for an improvement in the UK economy, investors are likely to return although the higher interest rates are going to limit the potential and risk triggering recession. Moves are expected to remain above the recent rally from 1.23 unless the growth prospects turn sour.

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Gavin Pearson

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• Specialises in forex G7 currencies

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